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Investigating Shari’ah and Liquidity Risk
Factors in Special Purpose Company and its
Role in Structuring Contemporary Waqf
Sukuk
Dr. NIDAL ALSAYYED, CEO
1
www.inayah.org
The Annual Intellectual Symposium of Islamic Financial Economics in London - ISBN: 978-0-
9869581-4-4 LAC
Wednesday, May 28th, 2014
Organized by:
ECO-ENA, Inc., Canada
Presentation Outline1. WHAT? RESEARCH TOPIC
2. WHY? THIS RESEARCH TOPIC / KNOWLEDGE
GAP
3. HOW? METHODOLOGY
4. RESULTS / CONCLUSIONS (Compared to Previous
Studies)
5. POTENTIAL APPLICATION FOR FINDINGS
6. QUESTIONS
2
INTRODUCTION• Diversity and flexibility in Islamic law (juristic views)
has contributed to rapid growth of Islamic finance.
• SPC/SPV based SUKUK…the most important product
for Islamic Banking by volume (tens of billions USD
issued) – mostly by corporations.
• SPC based SUKUK…combines both characteristics of
shares (represent ownership of assets, usufruct, and
rights) and debt instrument (lower risk profile + non-
profit-sharing)3
4
Who really owns the sukuk assets?(This simple maxim stresses the ownership of assets by the Sukuk holders)
مقتبس من تعليق الدكتور محمد أنس الزرقاء في سياق حديثه عن متطلبات السيولة في الصكوك
2010القائمة على األصول، ومخالفتها المباشرة للنصوص الصريحة، ندوة الصكوك، جدة
The answer to this controversial question depends on your
considerations (of form or substance). The above hadith simply
and directly says that once the return “ghunm” and liability
“ghurm” falls in anyone’s hand; then it automatically means
he really owns the asset
Contd...• Islamic Banks are holding lots of deposits, but their
Shari’ah-compliant options are limited.
• Some Islamic banks are playing a dangerous game,
which is essentially to match short-term liabilities
with investments in Sukuk, which have longer
maturities.
• Total global Sukuk issuance increased from a size of just
over US$ 1 billion towards the end of 2001 to US$ 179 billion
as of 30th June 2010, a compounded annual average growth
rate or CAGR of 88%. (IIFM, 2010)5
Contd...• Global sales of sukuk fell 23% to $6.5bn so far this
year (2013), according to data compiled by
Bloomberg. Issuance totaled $20.2bn last year, up
from $14.1bn in 2011.
• Comparative Shari’ah interpretations of Bai al-Dayn or debt
trading (Saudi Arabia)
• IFIS (i.e. IIFM) , ZAWYA, Bloomberg, Security Commission,
Investment banks (95% CI, Bayesian Stat.): Issued Sukuk
(pending and matured) = Approx. 690 issues until May 2012,
85% not listed6
Growth of SPC based Sukuk Market (No. Issued per year- IIFM/ DIFX)
8
SUKUK ISSUES
0
50
100
150
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
SUKUK ISSUES
Sukuk Parties
ISSUER (SPV) (Obligor in Mush.)
(Guarantee)
SUKUK HOLDERS
ORIGINATOR
(Purchase Undertaking from
Issuer)
10
Sukuk vs. SPC
“Sukuk = Investment Certificates“; are securities
representing ownership of income-generating assets,
or shares of partnership (i.e. Musharakah) in any
business activity characterized by fixed income, short
term, and guaranteed debt on the originator or
obligor.
Sukuk Liquidity concerns
How can we beat or avoid liquidity issues in Sukuk
relative to other financial products floated in
developed and emerging markets?11
Equity-based Sukuk
“Equity-based Sukuk”: Sukuk where the returns to
sukuk holders are determined on the basis of profit-and-
loss sharing in the underlying investment (e.g.
Musharakah or Mudarabah) or via any Shari’ah-
compliant instrument where debt creation is as a result
of a deferred sale (i.e. sales-based, Istisn’aa).
12
Islamic Securitization (Sukukization)
• Differences (Juristic & legal) between Malaysia and
GCC. How do we weigh (Masaleh & Mafasid)
(Shariah objectives in today’s Islamic Finance)?
• How does it impact classification of Sukuk Issuances
in GCC and Malaysia and affect Sukuk Liquidity?
13
Why GCC and Malaysia?• GCC: Besides being the leader in the overall global
Islamic market in terms of both volume and value, with a
total credit worth approximately over US$ 168 billion,
GCC has also pioneered a whole lot of innovations in the
domestic as well as international market.
• Malaysia: The largest Sukuk issuance market by volume
in the world.
• Hallmark Equity-based Sukuk Issues from GCC &
Malaysia:
• Khazanah, Bin Ladin group, Electricity SA14
Contd…• Dubai:
DIFX is the Middle East region’s International Exchange
(proclaimed as having the highest international regulatory
standards in the region) and first-class listing of all sukuk
issued in the region.
• Hallmark Equity-Based Sukuk Issues from Dubai:
Dana Gas, DP World, DIFC, Aldar Properties, PJSC
15
Research Questions• First: What is the special purpose company, and what are the
reasons behind its appearance?
• Second: What are the characteristics of the special purpose
company, and what are its types?
• Third: What is securitization, its pillars and importance?
• Fourth: What is the importance of the special purpose company in
the securitization process?
• Fifth: What function does the special purpose company play in the
securitization process and the structuring of Islamic Financial
products?
• Sixth: What is the legal jurisprudence and Shari’ah objective position
on the special purpose company?16
OBJECTIVES OF THE STUDY
• To show the concept of the special purpose company and the reasons behind its emergence.
• To expose the characteristics of the special purpose company and its types. To exert best effort to research the concept of the securitization process, and show its importance and major financing components
• To show the importance of the special purpose company in thesecuritization process.
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Sukuk Relevant Standards & Rulings
AAOIFI (Dubai): Shariah Sukuk Standard 17 (2, 5/1/12, 5/1/8/5), Reserve Standard 13 (8/8/3), PU Standard 12 (3/1/6/2), Guarantee 5 (2/2/1/- 2/2/2)
IFSB: IFSB 2, IFSB 7
OIC: (7/2)64 (Installment sale provisions), (11/4)101 (sale of shares and bonds), (17/7) 158 (Sale of Debt), Decision No. 1-2 (16th Circular) on Securitization
18
• Al-Tawreeq wa Mada Ahmmiyatahu fi Dhil Qanoon Al-Rahn Al-
Aqari [Translated as: Securitization and its importance in relation
to the real estate mortgage] (Al-Hijazi, Obaid Ali Ahmad 2001)
• Dawr Al-Sukuk Al-Islamiyah Fi Tamweel Al-Mashroo’at Al-
Tanmawiyah [Translated as: The role of Islamic Sukuk in financing
development projects] ( Mohammed Saleh and Fath- Al-Rahman
Ali, 2008)
• Al-Tawriq wa Baqiyat Adawat Al-Suyoolah li-sook Al-Islamiyah
[Securitization and the rest of liquidity instruments for Islamic
market] (Mala’ekah, Saleh 2005)
20
Recent Related Studies (2007 – 2013)
Elements of SPC Equity-based Sukuk Securitization
True Sale
(Accounting and legal) Profit Sharing
Bankruptcy Remoteness Loss Sharing (Not. Applied)
Enforceability of Security Islamic Securitization
21
QUANTITATIVE (30%)
(Data Collection various sukuk…) GCC and Malaysia
(GCC and Malaysia)
QUALITATIVE (70%)
(The main focus in this methodology is to collect and analyze materials or data in
respect to SPC based equity Sukuk issuance. This includes the types of structures used, legal and Shari’ah
issues.
Growth trends data has been extrapolated for the latter part of 2010 and the year 2013 (Size over
USD$ 900million)
RESEARCH METHODOLOGY
23
• All issues reported are issued Sukuk and already
matured.
• If part of the same term sheet, all tranches are grouped
as one issue (even if of different maturity and yields)
• The USD$ value of Sukuk denominated in local
currency was calculated based on the average monthly
exchange rate at which it was issued.
24
25
0
100
200
300
400
500
600
700
Jan 2001 toNov. 2007
Jan 2001 toAugust. 2009
Jan 2001 toMay 2010
Number of SPC based Sukuk Issues Worldwide (IFIS & ZAWYA databases)
Worldwide Sukuk Issues inonline Databases
495
590 620
• The dissertation is arranged and divided into six
chapters:
• Chapter (1) INTRODUCTION: consists of
scope, objectives, Problem Statement,
Research Questions, methodology, Literature
review, and outline of the chapters.
• Chapter (2) "THE COMPANY"
LITERATURE27
• Chapter (3) SPECIAL PURPOSE COMPANY (SPC)
ROLE IN FINANCE
• Chapter (4): LEGAL AND SHARI’AH FRAMEWORK FOR
SPECIAL PURPOSE COMPANY IN ISLAMIC FINANCE
• Chapter (5): SPECIAL PURPOSE COMPANY (SPC) IN
SUKUK STRUCTURING
• Chapter (6): CONCLUSIONS, RECOMMNEDATIONS,
AND FUTURE OUTLOOK
28
Impact of SPC
Structure
On Issuances
• Impact on Issuances and Risk- 5 years
Shariah Standards in Monopolistic
/interest dominated
Market
• Risk in Perfect competition vs. Monopolistic Market
SPC/ PU and for Equity
Backed Sukuk
• Impact on Issuance and cost
• Shari'ah Standards/Objectives (Maqasid)
30
POTENTIAL APPLICATIONS OF FINDINGS
32
• Helpful in decision making and policy formulation .
• Gain some basic/practical knowledge and background on the level of research in the SPC based Equity Sukuk field.
A Government Securities Market
• Provide Shari’ah Solution to Islamic debt-based instruments which use LIBOR
Explore Equity-based Structure that
fulfill MaqÉÎid
CHALLENGES
Uniformity of rules between
regulators and
practioners.
Lack of
Sukuk data and Solution’s
parameters Calibration
Transparency
33